UK Budget: An Electoral “Statement”

Bottom line: The UK’s Autumn Statement came out mostly in line with our expectations, with one positive surprise that is clearly appealing for large portions of the electorate: a reform of the stamp duty on home purchases. As the richer will pay more, and more funds will be devoted to NHS, this reform clearly resembles Liberal Democrats’ and Labour’s flagship proposal of a “Mansion Tax.” With the March 2014 budget, the Chancellor addressed savers, businesses, exporters, pensioners and workers; with this Autumn Statement, George Osborne addresses homebuyers, another large and influential constituency (already lured in the past with the Help To Buy scheme). The slightly higher budget deficit (compared to March estimates) also serves the purpose of a providing marginal fiscal accommodation, always helpful in an electoral year. With the reiterated promise of eliminating the deficit by the end of next parliament, the Chancellor is sending the most relevant electoral statement: “”We are fiscally responsible and economically credible, let us finish the job.” Labour, which centered its rebuttal of the Statement on the stale theme of cost of living crisis, risks finding itself without its crucial argument in May, even if wages don’t raise much, thanks to much lower inflation.

Figure 1: Stealing Lib-Lab Clothes: New Stamp Duty More Severe than a Mansion Tax on The £ 1-2m Properties

Source: HM Treasury, RGE.

Revisions To Forecasts: A Mixed Bag

In this Autumn Statement, GDP growth is revised upward in the first 2 years (3% in 2014 and 2.4% in 2015, versus 2.7% and 2.3% respectively of the March budget), but lower in the subsequent years (for example, 2.2% in 2016, versus 2.6% of the budget). Inflation has been revised downward, now expected to be only 1.2% in 2015, for example. More importantly, the public sector net borrowing-ex banks (effectively the budget deficit) is expected to be higher in the first two years (£91.3bn in 2014-15 and £75.9bn in 2015-16, versus the previous estimates of £86.6bn and £68.7bn) but lower subsequently (to reach a budget surplus of £ 4bn in 2018-19 versus a previous estimate of £3.7bn, and on optimistic budget surplus in 2019-20 of £23bn). Taking these revisions together, the budget deficit (ex-banks, not Maastricht Treaty definition) as a percentage of GDP would be higher in 2014-15 and 2015-16 (5% and 4% vs 4.9% and 3.7% previously expected, respectively), but slightly lower subsequently. This means that the debt is now expected to peak at 81.1% of GDP in 2015-16.

A Small Political Price Worth Paying In An Electoral Year

Missing by small margins (especially in percentage of GDP) the budget deficit targets set in March of course does not make Osborne look particularly good, as it doesn’t (more importantly) having missed the target of eliminating the deficit by this parliament (in reality, at 5% of GDP, the deficit has been “only” halved). But this political price is well worth spending, for two reasons. First, a less severe fiscal austerity than that initially promised has only done good to the UK economy, which is now growing (as the Chancellor remarked) faster than any other advanced economy. In effect, the Chancellor has done in practice what he has always refused to do in theory: adopting a plan B, meaning less aggressive austerity. Secondly, the 0.3% of GDP of higher deficit in 2015-16 allows a modest (£ 1.03bn) fiscal expansion in the 2015-16 electoral year (paid for by fiscal restrictions in 2014-15, and 2016-2020).

At the same time, as the Chancellor said, “coming years will bring very substantial savings” in public spending: an admission that more austerity is to come, to balance the budget at the end of next parliament. This would chime with our estimate that around half of the needed austerity had still to come, despite PM Cameron’s claims.

Some of the Promised “Giveaways”…

The Autumn Statement contained most of the measures we anticipated in our preview: tax credits on R&D, a £250bn investment in the Northern Powerhouse, reduced taxes on apprenticeships schemes, plus the elimination of taxes for ISA and pension annuities for the surviving spouse, the freeze to the fuel duty, the progressive abolition of the passenger duty for people less than 16 years old, a small increase in the thresholds for the no tax area and the higher tax bands. All these small giveaways are partially paid for by a 25% tax on the profits of the multinational diverting their profits elsewhere (expected to yield £ 1bn in five years), and a reduced possibility for banks to offset the losses of the financial crisis in subsequent years, higher taxes for the non-domiciled (all popular categories among the general public).

… and Some Unexpected Surprises, Especially the New Stamp Duty

But together with these small electoral giveaways, the government has introduced three important (and partially unexpected) reforms, with a high political impact. The structure of business tax rates will be subject to a full review, with a clear intention of reducing them (starting with a few measures in this Statement). Second, the entice voters in Northern Ireland, Scotland and Wales: In NI, corporation tax setting powers will be devolved to the local government; In Wales, the government will be given full devolution of business rates. For Scotland (a traditionally “hostile” territory for Tories) the government has agreed to the devolution of income tax rates and thresholds.

Finally, the reform of the stamp duty, in future paid as marginal tax, rather than flat. This would be almost neutral for houses up to £ 1mn (although the government claims it would benefit 98% of house-buyers), but would be higher for more expensive homes (Figure 1). Above the £ 2mn threshold (where a 12% marginal tax rate applies, instead of the current 7%), this would be even more costly. Together with the pledge of devoting £ 2bn more for NHS, the reform of the stamp duty resembles very closely to the “Mansion Tax.” As this was a flagship policy proposal by the Lib Dems and Labour, Osborne has effectively stolen from them a key argument for the electoral campaign.